BMO Capital Markets has upgraded ONEOK (NYSE: OKE) from Market Perform to Outperform with a new price target of $51. Since the stock is presently trading about $43.32, what could this firm possibly see in OKE that would suggest the stock will increase in value about 15%?
The company has evolved as a business in recent years. ONEOK rearranged its business in 2006 by acquiring a 100% share as General Partner in Northern Border Partners (now Oneok Partners LP) and then selling its midstream segment to the partnership. Now, ONEOK is a gas utilities company that is General Partner AND a 46% Limited Partner in a pipeline and storage partnership.
In this business gas and oil prices are always a concern. Natural gas prices seem to be stabilizing and many analysts believe the worst is behind and better days are ahead. Ironically this company has faired pretty well, especially as of late. Compared to some other companies in the NG industry, ONEOK has grown in value and has a better downside risk than some of its competitors. Take a look at the performances of some of them from their highs in 2011 until now:
- Devron Energy Corp (DVN) is down from 92 to 56.
- Newfield Exploration (NFX) is down from 75 to 30.
- EOG Resources (EOG) is down 120 to 98.
- Southwestern Energy Company (SWN) is down from 50 to 32.
ONEOK is positioning itself well for the future as NG prices increase and the platform it will be using to grow will be the Bakken pipeline.
The Bakken Express Pipeline
The $1.5 billion Bakken Express pipeline is gaining traction. The project has been estimated to be worth $5 a share to investors. As the year moves on, management should reveal more about its progress. It is to be built between the Bakken Shale in North Dakota and Cushing, Oklahoma to provide an efficient method of transportation of its products. This is also a key point in diversification for the company, spreading out its downside risk. The pipeline will also represent entry into the crude oil transportation business. It is considered the company's center for future growth with strong economic feasibility to provide services for both producers and refiners. So this pipeline will be a great revenue source for a company that already has a reputation for taking care of its shareholders.
Caring About Its Shareholders
If there is one company we can see that really tries to help its shareholders, it would be this one. It is always making moves to bring value to its stock and provide attractive distributions. Recently, it completed its two-for-one stock split of the company's common stock. It entered into a share buyback agreement worth $150 million with Goldman, Sachs & Co., a unit of The Goldman Sachs Group, Inc. (GS). Per the agreement, ONEOK has instantly purchased approximately 3.6 million shares from Goldman, Sachs & Co. at Monday's closing stock price of $41.19 per share. Of the shares repurchased, 80% will be received immediately. Oneok expects its net income to increase by 18% annually between 2012 and 2014. It plans to increase its dividend by 40% between 2012 and 2014. These increases will be driven by volume growth of natural gas and natural gas liquids and not by higher commodity prices or wider price differentials. Its wide array of services, supply diversity, excellent market connectivity and low operating costs provide distinct competitive advantages in this field and makes an attractive company to own. .
Are there any reasons not to own this company?
I really like this utility company but everything has to have a downside. If I could play devil's advocate for a moment, what type of risks do I see that an investor should consider before buying into the company? I guess the easiest thing to see first is the continuous decline in natural gas. This translates into lower margins obviously and storage prices. Another consideration would be weather. This is something that cannot be controlled, but the NGS is sensitive to changes and also very seasonal. Nature could bring on conditions that have a direct influence upon the amount of natural gas that gets delivered to customers and the results could be poor financial performance. This must be a consideration for all investors
With these considerations in mind, I think OKE warrants an investor's time for a more thorough investigation. It has a solid reputation for supporting investors and a management team with a good vision for the future of the company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.